Landlord and tenant — Rent review clause — Landlords’ notice under clause not given within time prescribed — Whether time of the essence of the contract — Interrelation between break clause in favour of tenants and rent review clause — Analysis of the kind of interrelation which displaces the presumption that time is not of the essence — Principles stated in United Scientific Holdings Ltd v Burnley Borough Council — Held that in the present case the interrelation was such as to displace presumption — Time therefore of the essence in the review clause as it was in the break clause — Landlords’ notice accordingly void — No case for rectification — Comments on estoppel —- ‘highly unusual’ time-limit in present review clause
In these
proceedings two of the plaintiffs, Mr Rahman and Mr Uddin, were the tenants of
premises used as a restaurant at 46 Bedford Street, Strand, London. The third
plaintiff, Mr Baker, was their solicitor and a surety in respect of the
tenancy. The defendants, Kenshire, were the landlords. The plaintiffs sought a
declaration claiming that a notice served by the landlords purporting to
operate the rent review clause in the tenancy was invalid because it did not
comply with a provision that it should be ‘given to the lessee not less than
nor more than twelve months before’ the review date.
J K Reynolds
(instructed by Alban Gould, Baker & Co) appeared on behalf of the
plaintiffs; I D Iwi (instructed by Hicks, Arnold, Rose, Johnson) represented
the defendants.
Giving
judgment, CANTLEY J said: In 1965 the defendants’ predecessors in title made a
lease of a shop and other accommodation at 46 Bedford Street, Strand, to
Ottavio Pelligrinelli, who carried on at those premises the business of a
restaurant proprietor. Presumably it was an Italian restaurant. The lease was
for a period of 21 years from June 24 1965 and the rent is expressed in this
way:
Yielding and
paying therefor the yearly rent of £1,500 (subject to increase in accordance
with the provisions contained in the schedule hereto) such rent to be paid
without any deduction by equal quarterly payments in advance on the four usual
quarter days in every year, the first of such payments to be made on the
execution hereof.
I will refer
later on to the schedule which is mentioned in that part of the lease.
Clause 3(v) of
the lease provided as follows:
If the lessee
shall be desirous of determining this present lease at the expiration of the
seventh or fourteenth year of the term hereby granted and of such his desire
shall give six calendar months’ previous notice in writing to the lessors and
shall pay all the rents and perform and observe all the covenants herein
reserved and contained and on the part of the lessee to be paid performed and
observed up to such determination, then and in such case immediately after the
expiration of such seventh or fourteenth years of the said term as the case may
be this present lease and everything herein contained shall cease and be void
without prejudice to any right of action or remedy of either party in respect of
any antecedent breach of any of the covenants of the other party hereinbefore
contained.
The schedule
already mentioned reads as follows:
The said
yearly rent of £1,500 reserved in clause 1 of the lease shall be subject to
increase in manner hereinafter appearing: (1) the lessors may by notice in
writing given to the lessee not less than nor more than twelve months before
any and every seventh anniversary of the 24th day of June 1965 requiring the
rent as from such anniversary (hereinafter called ‘the date of review’) to be
reviewed.
Paragraph 2 of
the schedule provides for the rent to be the rack rental value of the premises
as determined by an arbitrator in default of agreement between the parties, and
the expression ‘rack rental value’ is defined in paragraph 3.
There were
only two seventh anniversaries before the term of the lease would expire by
effluxion of time. The first seventh anniversary would be on June 24 1972 and
the second on June 24 1979. The lease would cease by effluxion of time on the
third anniversary, which would be June 24 1986.
In 1966 Mr
Pelligrinelli wanted to sell his business, and the plaintiffs, Mr Rahman and Mr
Uddin, wanted to buy it. I have not seen Mr Uddin, but I have seen and heard Mr
Rahman. He comes from what is now Bangladesh, and his English is difficult and
sometimes impossible to understand. Equally he has evident difficulty in
understanding English questions addressed to him.
In 1966 he was
a waiter and had never, so far as I know, previously run a restaurant business.
Mr Baker, the third plaintiff, was the solicitor to the plaintiffs, and
particularly in the confidence of Mr Rahman. Mr Baker told me, and I accept,
that Mr Rahman relied on him not merely for all legal advice but to some extent
from time to time in business matters also.
Mr Rahman and
Mr Uddin eventually agreed to buy from Mr Pelligrinelli his interest in the
lease together with the goodwill of his business for a composite sum of £3,917.
They had not £3,917 between them, because they found it with the assistance of
a mortgage. It was first necessary to obtain the landlord’s consent to an
assignment of the lease. On July 5 1966 there was a licence to assign contained
in an agreement under seal made between the defendant’s predecessors in title
and the plaintiffs. Mr Rahman and Mr Uddin are described in this document as
‘the proposed assignees’, and Mr Baker is described as ‘the surety’.
By clause 3 of
the licence it was provided that ‘The proposed assignees jointly and severally
covenant with the lessors that the proposed assignees will pay the rent
reserved by the said lease or such other rent as shall from time to time be
substituted therefor under the provisions of the said lease on the days and in
the manner therein provided, and will perform and observe all the covenants and
conditions therein contained’.
By clause 4 of
the licence it was provided that ‘The surety covenants with the lessors that
the proposed assignees shall and
not know — ‘pay the rent reserved by the said lease or such other substituted
rent as aforesaid and perform and observe the covenants and conditions’; and he
covenanted that in the event of the default of the tenant he would pay the rent
himself as guarantor.
The formal
assignment of the lease was made on July 8 1966. It does not seem that the
business of Mr Rahman and Mr Uddin, which was the business of a Pakistani or
Bangladesh restaurant, as perhaps contrasted with an Italian one, was ever very
prosperous. Profits turned out not to be enough for two, and after one or two
years Mr Rahman bought out Mr Uddin’s share of the business and Mr Uddin went
elsewhere, although he remained a tenant bound under the terms of the lease. He
is said now to be a waiter in a restaurant in Enfield, and he does not seem to
have taken any particular interest in this action.
Even after Mr
Uddin ceased to take a share of the profits of the business, Mr Rahman was
short of money. The agreed correspondence shows that he was frequently in
arrears with his rent and insurance and that as late as 1977 the defendants,
who had by then become the landlords, were threatening Mr Rahman with immediate
proceedings for arrears of rent and possession of the premises. On August 5 1978
a fire severely damaged the premises and the business had to be suspended.
Fortunately for Mr Rahman, under the terms of the lease, the obligation to pay
rent was suspended until the premises were reinstated. They are not, as far as
I understood Mr Rahman, completely reinstated yet, but he has been in business
again at the premises since November 1979. He said that it turned out that the
insurance cover was not sufficient, and so although the fire saved him rent it
has involved him in some unknown amount of expense personally.
In the
meantime, on January 15 1979 the defendants gave formal notice to Mr Rahman and
Mr Uddin under the terms of the lease requiring the rent of the premises to be
reviewed as from June 24 1979. The plaintiffs make no criticism of the form of
the notice, and it is common ground that if this notice is valid it will result
in the annual rent being increased to about £7,000 as from June 24 1979.
The plaintiffs
contend that the notice is not a valid notice because it was given out of time,
or alternatively that in the circumstances the defendants are precluded from
relying upon the notice. The dispute is a matter of vital importance to the
plaintiffs and of very considerable financial importance to the defendants. The
importance to the plaintiffs is this: Mr Rahman says — and I believe him — that
he cannot afford to pay anything like £7,000 a year in rent. I have no reason
to suppose that Mr Uddin is in any better financial situation than Mr Rahman.
Such indications as I have been given about him are quite to the contrary.
However, these tenants have no escape from the obligation to pay this greatly
increased rent from June 24 1979 when it is ascertained if the defendants’
notice is valid and enforceable. They have completely lost the right to
determine the lease. Under clause 3(v) the latest date at which they could have
given notice to determine the lease on June 24 1979 was December 24 1978,
nearly two months before they had the notice requiring the rent to be reviewed.
The best they could hope to do now to avoid incurring liability for further
rent which they cannot pay would be to find, in the words of the lease, ‘a
respectable and responsible tenant’ to whom they could assign the lease,
probably at a profit, which would be small after paying the costs of the sale.
Even then, they would be owing thousands of pounds of rent already accrued.
The first
point I have to consider is whether paragraph 1 of the schedule, whatever its
ultimate legal effect may be, means that the lessor’s notice requiring the rent
to be reviewed must be given not less than nor more than 12 months before the
seventh anniversary. That is certainly exactly what it says. The notice must be
given on one specific day and no other — a highly unusual and perhaps unique
provision for such a notice. Mr Iwi says it is ridiculous and is an obvious
mistake, and he has pointed out some of the inconveniences it could cause in
practice. It appears that in other leases granted by the same landlords to
other tenants the phrase in paragraph 2 of the schedule is ‘not less than one
nor more than twelve months before any and every seventh anniversary’; and in
this action the defendants claim, if necessary, to have inserted by way of
rectification the word ‘one’ in the appropriate place in paragraph 1 of the
schedule to the lease. Alternatively, Mr Iwi’s oral, though not pleaded,
contention is that he is entitled to have paragraph 1 of the schedule rectified
if necessary by the insertion of a blank between the words ‘than’ and ‘nor’. If
successful in that unusual piece of rectification, he would then go on, he
says, to persuade me that that part of the paragraph is incomplete and
meaningless, and the whole paragraph should then be construed by ignoring that
part.
I find this a
surprising piece of rectification, resulting as it would in changing a clause
which they say is mistaken to one which they know is wrong.
I have had no
oral or affidavit evidence from any of the original parties to the lease or
their agents. I am told none is available after this lapse of time. None of the
parties to the present action was a party to the original lease. I have,
however, been shown the agreed correspondence between the respective solicitors
of the original parties who, on the face of it, agreed the terms of a draft
which is now reproduced exactly in the lease.
On August 23
1965 the original lessee’s solicitors wrote to the original landlord’s
solicitors as follows: ‘We thank you for your letter of the 17th instant
enclosing the draft lease for approval, and we are obliged for the spare copy
for our use. We are taking our client’s instructions on the draft and will
write to you again shortly’.
On September
10 1965 the original lessee’s solicitors wrote as follows: ‘We now return the
draft lease approved as slightly amended in red ink’. I have seen the draft
which it is agreed accompanied this letter. It is amended in red in only four
respects, or five if I count the substitution of one letter in a word to
correct its spelling. In paragraph 1 of the schedule the word ‘one’ has been
deleted in red ink in the draft, leaving the paragraph as it now appears in the
lease.
On September
13 1965 the then landlord’s solicitors replied as follows: ‘We thank you for
your letter of the 10th instant returning the draft lease approved as slightly
amended, and we accept your amendments. We will write to you again shortly with
the counterpart lease for execution by your clients’.
The lease
subsequently drawn up and executed embodies all the amendments including the
deletion of the word ‘one’. Mr Iwi rightly concedes that the lessee’s
solicitors must have intentionally deleted the word ‘one’ in red. They were not
having that. However, he ingeniously suggests that the solicitor who did this
probably intended to substitute some other period for one month, and he was
unfortunately somehow interrupted in this part of his work and by oversight
never resumed it. As a flight of fancy that has considerable attractions, but I
do not consider that imagination, however bright, unsupported by actual
evidence, can be used to contradict the plain effect of documents which at
least purport to have been considered by the parties. The words on the lease
itself are clear. If I look at the only evidence I have outside the lease
itself, it seems to me that so far from indicating mistake it indicates that
paragraph 1 of the schedule to the actual lease, however unusual or eccentric,
is the provision which the parties actually agreed upon. There is, of course,
nothing in law to prevent their making such an agreement if they chose to do
so.
The next point
to consider is whether the time specified in the lease for giving notice
requiring review of the rent is of the essence of the contract. It has been
settled since the case of United Scientific Holdings Ltd v Burnley
Borough Council and Cheapside Land Development Co Ltd v Messels
Service Co [1978] AC 904 that the presumption is that the time specified
for giving notice in a review clause in a lease, unlike the time specified for
a tenant giving notice to determine the tenancy, is not of the essence of the
contract. This presumption may, of course, be displaced by appropriate
evidence. In the United Scientific Holdings case the principle was
stated as follows by Lord Diplock at p 930:
Upon the
question of principle which these two appeals were brought to settle, I would
hold that in the absence of any contra-indications in the express words of the
lease or in the interrelation of the rent review clause itself and other
clauses or in the surrounding circumstances the presumption is that the
time-table specified in a rent review clause for completion of the various
steps for determining the rent payable in respect of the period following the
review date is not of the essence of the contract.
Is there a
contra-indication in the express words of paragraph 1 of the schedule? Certainly they are a very peremptory and
precise statement of the time at which notice is to be given, and I was at
first sight inclined to think that they plainly indicated that no other time would
do. However, in the case of Cheapside Land Development Co Ltd, in the
reported case to which I am at present referring, the House of Lords considered
the wording in a review clause specifying the time as ‘not more than twelve
months nor less than six months prior to the review date’, and held that the
general presumption applied to this specifically restrictive expression of the
time-limit. I do not, therefore, hold that in the present case there is
adequate contra-indication in the express words used in this schedule.
Is there a
contra-indication in the interrelation of the rent review clause and other
clauses or in the surrounding circumstances?
In this lease there are only two occasions in fact when the landlord may
require the rent under this lease to be reviewed. The first is the seventh
anniversary and the second is the 14th. On the 21st anniversary the lease ends
by effluxion of time. Correspondingly, there are only two occasions when the
lessee many terminate the lease by notice: the first is at the seventh
anniversary and the second is at the 14th. It will terminate itself at the
21st. If the landlord gives notice as specified 12 months before the relevant
anniversary, the lessee then has six months in which to consider whether to
respond by terminating the tenancy by six months’ notice.
In my view the
two clauses are interrelated and the implication is that time is of the essence
in the review clause, as it certainly is in the break clause.
In the United
Scientific Holdings case at p 936 Lord Diplock referred to the case of Samuel
Properties (Developments) Ltd v Hayek [1972] 1 WLR 1296, and said:
There was a
complication in that the rent review clause was associated with a break clause
which gave to the tenant the right to surrender the residue of the term on any
rent review day by giving prior notice. The timetable in the rent review clause
for the determination of the new rent was obviously correlated with the time by
which the tenant had to give notice of his intention to surrender, so as to enable
him to make his decision whether or not to exercise that right in the knowledge
of what the new rent would be if he continued in possession after the review
date. Had that been all, as it had been in the previous and rightly decided
case of C Richards & Son Ltd v Karenita Ltd (1971) 221
ESTATES GAZETTE 25, it would, I think, have been sufficient by necessary
implication to make time of the essence of the rent review clause because of
its inter-relation with the time by which notice was to be given under the
break clause — a time which, for reasons I have given earlier, I consider to be
of the essence of the contract. In Samuel Properties (Developments) Ltd v
Hayek, however, the break clause itself contained a provision under
which the period during which the tenant could exercise his right to surrender
would be extended to the event of the reviewed rent not having been ascertained
within the time stipulated in the rent review clause. So the implication that
would otherwise have arisen from the association of the rent review clause with
a break clause was negatived.
Mr Iwi lays
great stress on Lord Diplock’s reference to the tenant in the Samuel
Properties case being able to make his decision with the knowledge of what
the new rent would be, and he submitted that unless, under the provisions of
the contract, the tenant will know the actual agreed or determined amount of
the new rent before his time for giving notice expires there is no sufficient
interrelation of the two times to displace the general presumption that time is
not of the essence in the case of a landlord’s notice to review.
I do not think
that is right. That was not the factual situation in Richards & Son Ltd v
Karenita, as reported, which case was expressly referred to by Lord
Diplock and by Lord Fraser of Tullybelton as having been rightly decided on its
facts. Lord Fraser of Tullybelton said at p 962:
For these
reasons I am of the opinion that the equitable rule against treating time as of
the essence of a contract is applicable to rent review clauses unless there is
some special reason for excluding its application to a particular clause. The
rule would of course be excluded if the review clause expressly stated that
time was to be of the essence. It would also be excluded if the context clearly
indicated that that was the intention of the parties — as for instance where
the tenant had a right to break the lease by notice given by a specified date
which was later than the last date for serving the landlord’s trigger notice.
The tenant’s notice to determine the contract would be one where the time limit
was mandatory, and the necessary implication is that the time-limit for giving
the landlord’s notice of review must also be mandatory. An example of such
interlocked provisions is to be found in C Richards & Son Ltd v Karenita
Ltd where the decision that time was of the essence of the landlord’s
notice could be supported on this ground, although not, as I think, on the
ground on which it was actually rested.
To displace
the presumption it must be necessary that the interrelation includes the tenant
being placed in a position by the timetable to know or assess the financial
consequences of review before the time comes to serve his own notice. But in a
case such as the present one, and in most cases, the tenant of his own
knowledge or by skilled advice which is readily available, can calculate before
the time comes to serve his own notice what the new rent will probably be, at
least sufficiently to be able to make a business decision about it. He can safely
assume in these days that the figure will not go down in the next six months,
and he or his advisers can estimate, although not perhaps precisely, the extent
to which it will probably go up. I see that paragraph 2 of the schedule to the
present lease provides for the new rent to be settled by agreement, and it
would be natural for the tenant to ask what rent the landlord proposes to claim
and seek advice accordingly.
I hold that
the time prescribed in paragraph 1 of the schedule to the lease is of the
essence of the contract and that accordingly no effective notice has been given
by the landlords.
In the
circumstances it is perhaps unnecessary to consider the other contentions which
have been raised in the course of the case, but I will mention them briefly. I
have already indicated that no case for rectification has been made out. There
is no evidence of common mistake and no evidence of any prior agreement between
the parties which differs from the terms of the lease. Furthermore, even if the
lease could have been rectified between the original parties, rectification
should not be granted against the plaintiffs, who are bona fide purchasers,
without notice: see the cases referred to in Snell’s Principles of Equity,
27th ed p 618, and particularly the case of Smith v Jones [1954]
1 WLR 1089.
The plaintiffs
have contended that even if the landlord’s time for giving notice requiring
review is not of the essence of the contract, the defendants are estopped from
relying upon it by reason of their unreasonable delay. They could have given a
valid notice in June 1978 or at any time during the following six months, but
they chose to stand by and delay until after the tenants had lost for ever
their right to determine the tenancy under its terms. In the United Scientific
Holdings Ltd case at p 951 Lord Salmon observed:
Nevertheless
any unreasonable delay caused by the landlords which is to the tenants’
prejudice would prevent the rent being revised after the review date.
In case it
should be material hereafter, and as I have seen and heard the witnesses, I
find the following facts: If Mr Rahman had received a notice on June 24 1978 or
before December 24 1978 he would have brought it to Mr Baker. Mr Rahman would
not have understood it himself anyway, and he had and has great faith in Mr
Baker and relies completely on his advice in legal matters, and to some extent
in some matters of business. Mr Baker would have found out what the new rent
would be likely to be and whether it was the kind of rent which would be within
Mr Rahman’s means, so that his business could continue to be viable. If he had
made the pertinent enquiries he would have found that the rent was one which Mr
Rahman could not afford to pay, and he would have advised Mr Rahman to
determine the tenancy. I think he would have advised him strongly to get out of
the obligations of the lease, because apart from Mr Rahman’s interest his own
as surety was very much involved and he would not want to take unnecessary
risks of that magnitude. I accept Mr Baker’s evidence and I find that at least
as a strong probability Mr Rahman would have accepted Mr Baker’s advice.
Mr Iwi, during
cross-examination, pointed out to Mr Baker that he ought not to have advised Mr
Rahman in a matter such as this where his own interest might conflict with Mr
Rahman’s. When this was explained to him, Mr Baker agreed; but it was obvious
to me
have occurred to him in 1978, when the defendants would have been firmly
contending, as they do now, that their notice was a valid one. The probability
is that Mr Rahman would have determined his tenancy and escaped the liability
which has already fallen upon him if the defendants are right. Moreover, he
would have had about six months in which to find some other premises at which
to carry on his business, possibly in a neighbourhood more suitable for his
class of restaurant and where market rents were lower. There need have been no
or no substantial interval between ceasing the business at the defendants’
premises and beginning business elsewhere.
In this
connection I have noticed that as long ago as December 1967 and July 1969 the
then landlords were benevolently pointing out to Mr Baker in correspondence
that 46 Bedford Street was not a suitable location for this type of restaurant
and that in the words of one of the letters ‘the tenants have bitten off more
than they could chew’.
Judgment was given for the plaintiff tenants with
costs. Declaration made that landlords’ notice under the review clause was
void.
